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Bitcoin and Its Siblings, Safe- Haven Alternative?

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For UBS marketing purposes Cryptocurrencies might be attractive to speculative investors, but they are neither a suitable alternative to safe-haven assets, nor do they necessarily contribute to portfolio diversification. (ddp) Cryptocurrencies Bitcoin and its siblings, safe- haven alternative? 26 April 2021, 6:35 pm CEST, written by UBS Editorial Team Bitcoin and other cryptocurrencies captured widespread attention in 2017 when their prices skyrocketed. The period that followed saw them plunge in value and waning interest from mainstream investors. Many observers at this time declared this to be the end of cryptocurrencies. Yet cryptocurrencies have not gone away…. Although most have failed to recover fully from their deep drawdowns, they appear nevertheless to have benefited significantly from the simultaneous demand from investors for both riskier assets and safe havens. Both these trends have been driven by the fall in real interest rates—the difference between nominal interest rates and inflation—on the back of trillions of dollars of asset purchases by central banks. This has caused shares, gold, silver, and safe-haven currencies such as the Swiss franc to rally. However, so far this year, Bitcoin has outperformed all these assets. However, high volatility and large drawdowns on Bitcoin and other cryptocurrencies cast serious doubt on their suitability as a safe-haven asset. The growing correlation to other assets, if maintained, might also start to compromise their merits as portfolio diversifiers. As such, we think these assets should be viewed as speculative instruments rather than potential alternatives to safe havens or effective means of portfolio diversification. Our analysis suggests the following observations: 1. Not suitable for standard risk profiles: An investor's risk tolerance must be high to tolerate potentially large losses. Trading-oriented investors might find appeal in such price swings, but our analysis shows that getting the timing wrong can result in destruction of capital. 2. Survivorship bias: Choosing the right cryptocurrency is of utmost importance; while Bitcoin has done fantastically well over a longer-term horizon, other cryptocurrencies have fared a lot worse. In our view, investors often focus on the For UBS marketing purposes performance of the winners, without taking into account the performance of the losers. Differentiating between the winners and the losers requires a good understanding of the demand and supply drivers of any given cryptocurrency. 3. The lack of dividend and coupon payments: The timing of investments in cryptocurrencies is of high relevance due to the combination of potentially sharp drawdowns and the lack of regular interest or dividend payments. Risk assets commonly experience large drawdowns, and without regular cash flows this can more easily result in a permanent loss of wealth. 4. Limited diversification benefits: Our Bitcoin back-test improved the returns of a portfolio given its high absolute returns and its low correlation to other asset classes. More recently, however, correlations have increased and returns declined, suggesting Bitcoin may now be less suitable as a portfolio diversifier. For investors looking for a defensive tilt to their asset allocation, we recommend gold, investment strategies that exploit option-implied volatility to phase in market entry, and relative value positions, in addition to staying invested in a broadly diversified manner. We refer interested readers to UBS CIO's last monthly letter, The dog that didn't bark, Chief Investment Office GWM, 20 August 2020. These strategies will admittedly not compete with another market frenzy in cryptocurrencies, but they appear very attractive when we look at expected, risk-adjusted returns. For investors who are aiming to preserve and grow their wealth over time, we think these solutions are more suitable than an investment in cryptocurrencies. Main contributor: Michael Bolliger For more, see Bitcoin and its siblings, an alternative to safe-haven assets? 9 September, 2020. Important information: https://www.ubs.com/global/en/wealth-management/our-approach/marketnews/disclaimer.html The product documentation, i.e. the prospectus and/or the key information document (KID), if any, may be available upon request at UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zurich/Switzerland. Before investing in a product please read the latest prospectus and key information document (KID) carefully and thoroughly. Version B/2020. CIO82652744 © 2021 UBS Switzerland AG. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. Non-Traditional Assets Non-traditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alternative investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks. Specifically, these investments 1. are not mutual funds and are not subject to the same regulatory requirements as mutual funds; 2. may have performance that is volatile, and investors may lose all or a substantial amount of their investment; 3. may engage in leverage and other speculative investment practices that may increase the risk of investment loss; 4. are long-term, illiquid investments, there is generally no secondary market for the interests of a fund, and none is expected to develop; 5. interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; 6. may not be required to provide periodic pricing or valuation information to investors; 7. generally involve complex tax strategies and there may be delays in distributing tax information to investors; 8. are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits. Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund and should consider an alternative investment fund as a supplement to an overall investment program. In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in these strategies: • Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated with investing in short sales, options, small-cap stocks, "junk bonds," derivatives, distressed securities, non-U.S. securities and illiquid investments. • Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all managers focus on all strategies at all times, and managed futures strategies may have material directional elements. • Real Estate: There are risks specifically associated with investing in real estate products and real estate investment trusts. They involve risks associated with debt, adverse changes in general economic or local market conditions, changes in governmental, tax, real estate and zoning laws or regulations, risks associated with capital calls and, for some real estate products, the risks associated with the ability to qualify for favorable treatment under the federal tax laws. • Private Equity: There are risks specifically associated with investing in private equity. Capital calls can be made on short no-tice, and the failure to meet capital calls can result in significant adverse consequences including, but not limited to, a total loss of investment. • Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of the United States should be aware that even for securities denominated in U.S. dollars, changes in the exchange rate between the U.S. dollar and the issuer’s "home" currency can have unexpected effects on the market value and liquidity of those securities. Those securities may also be affected by other risks (such as political, economic or regulatory changes) that may not be readily known to a U.S. investor. .
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